Hot off the pressEarnings & Recommendation DowngradeCannot...

Hot off the press

Earnings & Recommendation Downgrade
Cannot Recommend A Purchase
† Nylex has again disappointed the market, further undermining management's credibility, in our view. There are a host of excuses for the calamitous profit warning issued at the AGM, but the buck has to stop somewhere, and we believe management's talk about the water strategy is indeed wearing thin - time to deliver!

† The mix of production cuts in the auto industry, weak hardware sales and import competition on wheelie bins has hit earnings hard. The interim pre-tax profit is expected to be down by 70%, with the full-year number to be down by 30-40%.

† A stronger result is projected for the second half (up 32%), mainly reflecting lower interest expense. Operating profits should actually be down due to the absence of earnings from AH Plant (to be sold Jan '06).

† We have reduced EPS forecasts by 62% in FY06E, 41% in FY07E and 48% in FY08E. While the FY06E reduction largely reflects cyclical factors, the pace of the recovery is somewhat uncertain.

† Today's share price correction has largely factored in the earnings revisions, in our view. If the takeover speculation proves correct, today's development could not have been better scripted.

† We have cut our rating to Hold / High Risk (2H) and target price to $0.17 (previously $0.32). It will be a long road back for Nylex, and we think it's only worth hanging in there if you believe a takeover is coming.


In my opinion SSB are generous with their valuation of 17c. This is based on a 2006e p.e. of 15.9 which I feel is too high given management's lack of credibility and the uncertainty surrounding future business plans.